The Concern with Going Concern Transactions

The Concern with Going Concern Transactions
October 23, 2018 Ben Driller

The sale of a going concern, in this case, where a property which includes a business, is bought or sold, often raises complications that are far too often swept under the rug, to the financial detriment of many vendors and purchasers.

Examples of going concerns often sold in this way include childcare centres, aged care facilities, reception and entertainment venues, hotels and motels, and as we’ve seen more recently – even panel beaters.

Although for GST purposes, property sold with a lease in place or a planning permit/development approval are often also considered going concerns, it’s the transaction of a property with a business attached, often including plant, equipment and stock, that requires further thought.

Where a business is involved in a property transaction, there’s usually a need to apportion value for the various components of the transaction for both stamp duty and capital gains tax purposes.

In a fast moving commercial property market such as the eastern states are now experiencing, it can be an expensive trap for a vendor of a going concern to rely on industry “rules of thumb” for values of going concerns, that have not kept up with rising commercial/industrial real estate values.  The danger is that they could be selling for far below current market value.

Also, for a vendor to maximise their position, their advising accountant should take into account the history of the property and business, and model the capital gains tax and stamp duty payable under separate apportionment scenarios and a valuation/s be obtained.

For a purchaser to maximise their position they need the help of a skilled advising accountant to gain an in-depth understanding of their plans for the future of the business and property, both combined or separately, whether it would be sold or transferred to another entity and how long it will be held.

With that known, an asset plan can be implemented, the business and property structured in the most appropriate entity/s and a valuation/s sought to determine the apportionment of value between, land, buildings, goodwill, plant and equipment and stock, to calculate and model the effect of stamp duty and capital gains tax scenarios, prior to settlement.

Different industries have their own “rules of thumb” to establish the value of going concerns and these are often well understood by operators in those industries.  These can often be a multiple of profits (EBITDA – Earnings Before Interest Tax Depreciation and Amortisation) or a rate per unit of operating capacity, or a combination of both.   More sophisticated methods of valuing going concerns also involve the use of discounted cash flow analysis (DCF).

The temptation for a vendor or purchaser when apportioning the value of the agreed sale price between the business and the real estate, might be to simply apply a percentage split or a crude assessment of one, then by deduction – the other.  However, this approach can leave the parties to the transaction at risk of audit.

An experienced and skilled valuer will gain a thorough understanding of the transaction and be able to provide an expert valuation of the apportionment between the various components that is well supported by comparable market evidence, using the most appropriate methodologies for both the real estate, goodwill, plant and equipment and stock.

An expert valuation provides the client with the peace of mind that the transaction has been well administered for both stamp duty and capital gains tax requirements, and well prepared for any audit in the future.